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A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Wednesday, July 28, 2021. - Photographer: Michael Nagle/Bloomberg
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In interviews and client research, global asset managers and some of the world’s biggest banks cautioned that credit pricing had reached levels consistent with a much stronger economic outlook than official forecasters anticipate for this year.
“We’ve turned very defensive in terms of developed-market credit,” said Mike Riddell, lead portfolio manager for strategic bond strategies at Fidelity International.
“We have zero exposure in terms of cash bonds and are short high-yield,” he added, referring to the use of derivatives products to bet an asset class will perform badly.
The spread that measures the premium corporate bonds pay in interest over government debt, the main valuation metric for credit, dropped to just one basis point above its 1998 low on Jul 29, Reuters analysis showed.
Markets are rallying worldwide, with European stocks hitting their biggest weekly gain since late April and Wall Street indices close to record highs, but investors and analysts said credit was the strongest example of exuberance.
As US economic data softens, investors said corporate credit was most vulnerable to a sustained slowdown in the world’s largest economy that could hit global growth, with equities likely to fall in turn.
Before 2018’s US-China trade war slump, 2022’s rate rise rout and a similar shake-up in late 2023, a popular exchange-traded fund tracking high-grade corporate credit fell some time before world stocks.
Stuart Kaiser, head of US options strategy at Citi, said the bank’s derivatives desks had in the last few weeks begun seeing significant demand from asset-manager clients for products that bet against the performance of that iShares index or gauges of junk bonds.
“It is probably macro investors taking a directional view or putting on a hedge against the rally we’ve seen in risk assets,” he said. “The fact people are now hedging credit risk tells you they see reasonable downside to equity markets over the next three months.”
Florian Ielpo, Lombard Odier Investment Managers’ head of multi-asset, said credit was “leading the market” already, based on shifts he had spotted under the surface of headline pricing.
According to his own analysis of global credit indices, he said, the proportion of business bonds where spreads were still narrowing had fallen abruptly from 80% to 60% in the five days to Aug 4.
“This is a significant move in the data and one you cannot ignore,” Ielpo said, because it was not usual. — Reuters
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